INCOME STATEMENT

DEPRECIATION
TYPES
 CASH FLOW STATEMENT

NEEDS

TYPES OF CASH FLOW STATEMENT

 DIFFERENCE BETWEEN

OPERATING EXPENSES RECORDING IN CASH FLOW STATEMENT

INVESTING ACTIVITIES
READING FINANCIAL STAEMENT

SHARES
TRADING A/C

ANNUAL REPORT
direct forecasting may be more suitable if you need sh
On the other hand, if you need long-term forecasting b

The direct method will actually add up all sales and costs to find out
The indirect method will start with net income, from the income state

WHICH IS USED MOSTLY

DIRECT The direct method uses real-time figures and c

The indirect method adjusts net income with ch
FINANCING ACTIVITIES
P/L A/C
e if you need short-term forecasting or don't have access to past financial statements.
rm forecasting based on detailed data, then indirect forecasting offers the better choice.

and costs to find out the total cash flow.

om the income statement, and take out any costs or assets that are included in the net income but are not actually c

me figures and considers only cash flow to show actual payments and receipts.
et income with changes applied from non-cash transactions.
atements.
ter choice.

but are not actually cash in and out.

 Construct a Balance Sheet for Nairobi Trading Inc.

You have been asked to build a Balance Sheet for a company called Nairobi Trading Inc. that has undertaken the following transactions

1. Issued common shares of 500.

2. Bought equipment for 300 with cash.
3. Bought inventory of 100. 80 of this was paid in cash. The remainder is outstanding at the balance sheet date.
4. Sold 75% of the inventory for 120. 100 of this had been received in cash at the balance sheet date.
5. Paid a cash operating expense of 15.

Journal Entries

1. Issued common shares of 500. Debit Credit

Cash
Common shares
– –

2. Bought equipment for 300 with cash. Debit Credit

Cash
Property, Plant & Equipment
– –

3. Bought inventory of 100. Debit Credit

Inventory
Cash
Accounts Payable
– –

4. Sold 75% of the inventory for 120 Debit Credit

Cash
Accounts Receivable
Revenue
Inventory
Cost of Sales
– –

5. Paid a cash operating expense of 15. Debit Credit

Cash
Operating Expense
– –

Practice Exercise - Nairobi Trading Page 47 of 66

Balance Sheet

ASSETS TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

Current Assets Current Liabilities

Cash Accounts Payable
Accounts Receivable Total Current Liabilties –
Inventory
Total Current Assets – Non-Current Liabilities
Long-Term Debt –
Non-Current Assets Total Non-Current Liabilities –
Property, Plant & Equipment
Total Non-Current Assets – Shareholders' Equity
Common Shares
Retained Earnings
Revenue
Cost of Sales
Other Operating Expenses
Total Retained Earnings –
Total Shareholders' Equity –

Total Assets – Total Liabilities & Equity –

Total Assets –
Total Liabilities & Equity –
Difference –

Practice Exercise - Nairobi Trading Page 48 of 66

 Construct a Balance Sheet for Nairobi Trading Inc.

You have been asked to build a Balance Sheet for a company called Nairobi Trading Inc. that has undertaken the following transactions

1. Issued common shares of 500.

2. Bought equipment for 300 with cash.
3. Bought inventory of 100. 80 of this was paid in cash. The remainder is outstanding at the balance sheet date.
4. Sold 75% of the inventory for 120. 100 of this had been received in cash at the balance sheet date.
5. Paid a cash operating expense of 15.

Journal Entries

1. Issued common shares of 500. Debit Credit

Cash 500
Common shares 500
500 500

2. Bought equipment for 300 with cash. Debit Credit

Cash 300
Property, Plant & Equipment 300
300 300

3. Bought inventory of 100. Debit Credit

Inventory 100
Cash 80
Accounts Payable 20
100 100

4. Sold 75% of the inventory for 120 Debit Credit

Cash 100
Accounts Receivable 20
Revenue 120
Inventory 75
Cost of Sales 75
195 195

5. Paid a cash operating expense of 15. Debit Credit

Cash 15
Operating Expense 15
15 15

Practice Exercise - Nairobi Trading Page 49 of 66

Balance Sheet

ASSETS TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

Current Assets Current Liabilities

Cash 205 Accounts Payable 20
Accounts Receivable 20 Total Current Liabilties 20
Inventory 25
Total Current Assets 250 Non-Current Liabilities
Long-Term Debt –
Non-Current Assets Total Non-Current Liabilities –
Property, Plant & Equipment 300
Total Non-Current Assets 300 Shareholders' Equity
Common Shares 500
Retained Earnings
Revenue 120
Cost of Sales (75)
Other Operating Expenses (15)
Total Retained Earnings 30
Total Shareholders' Equity 530

Total Assets 550 Total Liabilities & Equity 550

Total Assets 550

Total Liabilities & Equity 550
Difference –

Practice Exercise - Nairobi Trading Page 50 of 66

Calculating Different Forms of Depreciation

Calculate the three different types of depreciation below.

Straight Line

Purchase Price 25,000 Depreciation = (Cost - Salvage Value) / Useful Life of Asset
Scrap Value –
Useful Life 8

Period Opening Balance Depreciation Expense Closing Balance

1
2
3
4
5
6
7
8

Double Declining Balance

Purchase Price 25,000 Depreciation = (100% / Useful Life of Asset) x 2 x Opening Balance Book Value
Scrap Value –
Useful Life 8

Period Opening Balance Depreciation Expense Closing Balance

1
2
3
4
5
6
7
8

Practice Exercise - Types of Deprecation Page 51 of 66

Units of Production

Purchase Price 25,000 Depreciation = (# of Units Produced / Lifetime # of Units) x (Cost - Salvage Value)
Scrap Value –
Useful Life 8

Period Units % of Total Units Opening Balance Depreciation Expense Closing Balance
1 2,000 4%
2 3,500 7%
3 2,000 4%
4 11,500 23%
5 16,000 32%
6 6,000 12%
7 3,000 6%
8 6,000 12%
50,000 100%

Practice Exercise - Types of Deprecation Page 52 of 66

Calculating Different Forms of Depreciation

Calculate the three different types of depreciation below.

Straight Line

Purchase Price 25,000 Depreciation = (Cost - Salvage Value) / Useful Life of Asset
Scrap Value –
Useful Life 8

Period Opening Balance Depreciation Expense Closing Balance

1 25,000 3,125 21,875
2 21,875 3,125 18,750
3 18,750 3,125 15,625
4 15,625 3,125 12,500
5 12,500 3,125 9,375
6 9,375 3,125 6,250
7 6,250 3,125 3,125
8 3,125 3,125 –

Double Declining Balance

Purchase Price 25,000 Depreciation = (100% / Useful Life of Asset) x 2 x Opening Balance Book Value
Scrap Value –
Useful Life 8

Period Opening Balance Depreciation Expense Closing Balance

1 25,000 6,250 18,750
2 18,750 4,688 14,063
3 14,063 3,516 10,547
4 10,547 2,637 7,910
5 7,910 1,978 5,933
6 5,933 1,483 4,449
7 4,449 1,112 3,337
8 3,337 834 2,503

Practice Exercise - Types of Deprecation Page 53 of 66

Units of Production

Purchase Price 25,000 Depreciation = (# of Units Produced / Lifetime # of Units) x (Cost - Salvage Value)
Scrap Value –
Useful Life 8

Period Units % of Total Units Opening Balance Depreciation Expense Closing Balance
1 2,000 4% 25,000 1,000 24,000
2 3,500 7% 24,000 1,750 22,250
3 2,000 4% 22,250 1,000 21,250
4 11,500 23% 21,250 5,750 15,500
5 16,000 32% 15,500 8,000 7,500
6 6,000 12% 7,500 3,000 4,500
7 3,000 6% 4,500 1,500 3,000
8 6,000 12% 3,000 3,000 –
50,000 100%

Practice Exercise - Types of Deprecation Page 54 of 66

Construct Financial Statements for Cobble Hill Inc.

Produce a Balance Sheet and Income Statement for Cobble Inc. for Year 1

Transactions

YEAR 1

Issues common shares 1,000

Borrows 400
Repays loan
Pays interest 24

Buys property and plant 900

(10 year estimated useful life)

Buys inventory 350

Cash paid for inventory 320

Sells inventory 510

Cash received from sales 430

Inventory left at year end 60

Pays expenses 40
Pays tax at 30% –
Pays a dividend 30

Practice Exercise - Cobble Hill Part 1 Page 55 of 66

Balance Sheet

ASSETS YEAR 1

Current Assets
Cash
Accounts Receivable
Inventory
Total Current Assets –

Non-Current Assets
Property, Plant & Equipment
Total Non-Current Assets –

Total Assets –

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities
Accounts Payable
Total Current Liabilties –

Non-Current Liabilities
Long-Term Debt
Total Non-Current Liabilities –

Shareholders' Equity
Common Shares
Retained Earnings
Total Shareholders' Equity –

Total Liabilities & Equity –

Total Assets –
Total Liabilities & Equity –
Difference –

Practice Exercise - Cobble Hill Part 1 Page 56 of 66

Income Statement

YEAR 1

Revenues
Cost of Sales
Gross Profit –

Other Operating Expenses

EBITDA –

Depreciation
Operating Profit (EBIT) –

Interest Expenses (Finance Cost)

Profit Before Tax (EBT) –

Tax Expense at 30%

Net Income (EAT) –

Dividends
Retained Earnings –

Practice Exercise - Cobble Hill Part 1 Page 57 of 66

Construct Financial Statements for Cobble Hill Inc.

Produce a Balance Sheet and Income Statement for Cobble Inc. for Year 1

Transactions

YEAR 1

Issues common shares 1,000

Borrows 400
Repays loan
Pays interest 24

Buys property and plant 900

(10 year estimated useful life)

Buys inventory 350

Cash paid for inventory 320

Sells inventory 510

Cash received from sales 430

Inventory left at year end 60

Pays expenses 40
Pays tax at 30% 20
Pays a dividend 30

Practice Exercise - Cobble Hill Part 1 Page 58 of 66

Balance Sheet

ASSETS YEAR 1

Current Assets
Cash 496
Accounts Receivable 80
Inventory 60
Total Current Assets 636

Non-Current Assets
Property, Plant & Equipment 810
Total Non-Current Assets 810

Total Assets 1,446

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities
Accounts Payable 30
Total Current Liabilties 30

Non-Current Liabilities
Long-Term Debt 400
Total Non-Current Liabilities 400

Shareholders' Equity
Common Shares 1,000
Retained Earnings 16
Total Shareholders' Equity 1,016

Total Liabilities & Equity 1,446

Total Assets 1,446

Total Liabilities & Equity 1,446
Difference –

Practice Exercise - Cobble Hill Part 1 Page 59 of 66

Income Statement

YEAR 1

Revenues 510
Cost of Sales (290)
Gross Profit 220

Other Operating Expenses (40)

EBITDA 180

Depreciation (90)
Operating Profit (EBIT) 90

Interest Expenses (Finance Cost) (24)

Profit Before Tax (EBT) 66

Tax Expense at 30% (20)

Net Income (EAT) 46

Dividends (30)
Retained Earnings 16

Practice Exercise - Cobble Hill Part 1 Page 60 of 66

Construct the Cash Flow Statement for Cobble Hill Inc.

Produce a Cash Flow Statement for Cobble Hill Inc. for Year 2

Cash Flow Statement

YEAR 1 YEAR 2

Operating Cash Flow

Net income 46
Depreciation 90
Change in Accounts Receivable (50)
Change in Inventory (20)
Change in Accounts Payable 10
Cash From Operations 76

Investing Cash Flow

Property, Plant & Equipment (100)
Cash From Investing (100)

Financing Cash Flow

Issuance (Repayment) of Debt 100
Issuance (Repayment) of Equity –
Payment of Dividends (30)
Cash From Financing 70

Net Increase (Decrease) in Cash 46

Opening Cash Balance 450
Closing Cash Balance 496

PPE Start of Year 800

Capex 100
Depreciation (90)
PPE End of Year 810

Practice Exercise - Cobble Hill Part 3 Page 61 of 66

Balance Sheet
ASSETS YEAR 1 YEAR 2

Current Assets
Cash 496 419
Accounts Receivable 80 150
Inventory 60 80
Total Current Assets 636 649

Non-Current Assets
Property, Plant & Equipment 810 720
Total Non-Current Assets 810 720

Total Assets 1,446 1,369

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities
Accounts Payable 30 50
Total Current Liabilties 30 50

Non-Current Liabilities
Long-Term Debt 400 300
Total Non-Current Liabilities 400 300

Shareholders' Equity
Common Shares 1,000 1,000
Retained Earnings 16 19
Total Shareholders' Equity 1,016 1,019

Total Liabilities & Equity 1,446 1,369

Total Assets 1,446 1,369

Total Liabilities & Equity 1,446 1,369
Difference – –

Income Statement
YEAR 1 YEAR 2

Revenues 510 550

Cost of Sales (290) (380)
Gross Profit 220 170

Other Operating Expenses (40) (50)

EBITDA 180 120

Depreciation (90) (90)

Operating Profit (EBIT) 90 30

Interest Expenses (Finance Cost) (24) (18)

Profit Before Tax (EBT) 66 12

Tax Expense at 30% (20) (4)

Net Income (EAT) 46 8

Dividends (30) (5)

Retained Earnings 16 3

Practice Exercise - Cobble Hill Part 3 Page 62 of 66

Construct the Cash Flow Statement for Cobble Hill Inc.

Produce a Cash Flow Statement for Cobble Hill Inc. for Year 2

Cash Flow Statement

YEAR 1 YEAR 2

Operating Cash Flow

Net income 46 8
Depreciation 90 90
Change in Accounts Receivable (50) (70)
Change in Inventory (20) (20)
Change in Accounts Payable 10 20
Cash From Operations 76 28

Investing Cash Flow

Property, Plant & Equipment (100) –
Cash From Investing (100) –

Financing Cash Flow

Issuance (Repayment) of Debt 100 (100)
Issuance (Repayment) of Equity – –
Payment of Dividends (30) (5)
Cash From Financing 70 (105)

Net Increase (Decrease) in Cash 46 (77)

Opening Cash Balance 450 496
Closing Cash Balance 496 419

PPE Start of Year 800 810

Capex 100 –
Depreciation (90) (90)
PPE End of Year 810 720

Practice Exercise - Cobble Hill Part 3 Page 63 of 66

Balance Sheet
ASSETS YEAR 1 YEAR 2

Current Assets
Cash 496 419
Accounts Receivable 80 150
Inventory 60 80
Total Current Assets 636 649

Non-Current Assets
Property, Plant & Equipment 810 720
Total Non-Current Assets 810 720

Total Assets 1,446 1,369

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities
Accounts Payable 30 50
Total Current Liabilties 30 50

Non-Current Liabilities
Long-Term Debt 400 300
Total Non-Current Liabilities 400 300

Shareholders' Equity
Common Shares 1,000 1,000
Retained Earnings 16 19
Total Shareholders' Equity 1,016 1,019

Total Liabilities & Equity 1,446 1,369

Total Assets 1,446 1,369

Total Liabilities & Equity 1,446 1,369
Difference – –

Income Statement
YEAR 1 YEAR 2

Revenues 510 550

Cost of Sales (290) (380)
Gross Profit 220 170

Other Operating Expenses (40) (50)

EBITDA 180 120

Depreciation (90) (90)

Operating Profit (EBIT) 90 30

Interest Expenses (Finance Cost) (24) (18)

Profit Before Tax (EBT) 66 12

Tax Expense at 30% (20) (4)

Net Income (EAT) 46 8

Dividends (30) (5)

Retained Earnings 16 3

Practice Exercise - Cobble Hill Part 3 Page 64 of 66

 Construct the Cash Flow Statement for Ravensburger Inc.

1. Calculate the differences on the balance sheet

2. Calculate net CAPEX using the note below the cash flow statement
3. Complete the cash flow statement
4. The boxes to complete are in gray

Income Statement Balance Sheet Cash Flow Statement

ASSETS YEAR 1 YEAR 2 YEAR 2

YEAR 2
Current Assets Operating Cash Flow
Revenues 550 Cash 496 419 Net income
Cost of Sales (380) Accounts Receivable 80 150 Depreciation
Gross Profit 170 Inventory 60 80 Change in Accounts Receivable
Total Current Assets 636 649 Change in Inventory
Other Operating Expenses (50) Change in Accounts Payable
EBITDA 120 Non-Current Assets Cash From Operations
Property, Plant & Equipment 810 720
Depreciation (90) Total Non-Current Assets 810 720 Investing Cash Flow
Operating Profit (EBIT) 30 Property, Plant & Equipment
Total Assets 1,446 1,369 Cash From Investing
Interest Expenses (Finance Cost) (18)
Profit Before Tax (EBT) 12 Financing Cash Flow
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY Issuance (Repayment) of Long Term Debt
Tax Expense (4) Issuance (Repayment) of Equity
Net Income (EAT) 8 Current Liabilities Payment of Dividends
Accounts Payable 30 50 Cash From Financing
Dividends (5) Total Current Liabilties 30 50
Retained Earnings 3 Net Increase (Decrease) in Cash
Non-Current Liabilities Opening Cash Balance
Long-Term Debt 400 300 Closing Cash Balance
Total Non-Current Liabilities 400 300
Matches balance sheet
Shareholders' Equity
Common Shares 1,000 1,000 PPE Start of Year
Retained Earnings 16 19 Capex
Total Shareholders' Equity 1,016 1,019 Depreciation
PPE End of Year
Total Liabilities & Equity 1,446 1,369

Total Assets 1,446 1,369

Total Liabilities & Equity 1,446 1,369
Difference – –

Practice Exercise - Ravensburger Page 65 of 66

 Construct the Cash Flow Statement for Ravensburger Inc.

1. Calculate the differences on the balance sheet

2. Calculate net CAPEX using the note below the cash flow statement
3. Complete the cash flow statement
4. The boxes to complete are in gray

Income Statement Balance Sheet Cash Flow Statement

ASSETS YEAR 1 YEAR 2 YEAR 2

YEAR 2
Current Assets Operating Cash Flow
Revenues 550 Cash 496 419 (77) Net income 8
Cost of Sales (380) Accounts Receivable 80 150 70 Depreciation 90
Gross Profit 170 Inventory 60 80 20 Change in Accounts Receivable (70)
Total Current Assets 636 649 Change in Inventory (20)
Other Operating Expenses (50) Change in Accounts Payable 20
EBITDA 120 Non-Current Assets Cash From Operations 28
Property, Plant & Equipment 810 720 (90)
Depreciation (90) Total Non-Current Assets 810 720 Investing Cash Flow
Operating Profit (EBIT) 30 Property, Plant & Equipment –
Total Assets 1,446 1,369 Cash From Investing –
Interest Expenses (Finance Cost) (18)
Profit Before Tax (EBT) 12 Financing Cash Flow
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY Issuance (Repayment) of Long Term Debt (100)
Tax Expense (4) Issuance (Repayment) of Equity –
Net Income (EAT) 8 Current Liabilities Payment of Dividends (5)
Accounts Payable 30 50 20 Cash From Financing (105)
Dividends (5) Total Current Liabilties 30 50
Retained Earnings 3 Net Increase (Decrease) in Cash (77)
Non-Current Liabilities Opening Cash Balance 496
Long-Term Debt 400 300 (100) Closing Cash Balance 419
Total Non-Current Liabilities 400 300
Matches balance sheet ok
Shareholders' Equity
Common Shares 1,000 1,000 – PPE Start of Year 810
Retained Earnings 16 19 3 Capex –
Total Shareholders' Equity 1,016 1,019 Depreciation (90)
PPE End of Year 720
Total Liabilities & Equity 1,446 1,369

Total Assets 1,446 1,369

Total Liabilities & Equity 1,446 1,369
Difference – –

Practice Exercise - Ravensburger Page 66 of 66